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Tax on natural gas could bring wide benefits

Every once in a while, one of those economic policy dogfights comes along that involves huge sums of money and pits one powerful industry against another. The K Street lobbying machine goes into overdrive, dueling studies are commissioned, the think tanks start churning out policy briefs and rival committee hearings are scheduled on Capitol Hill.

The latest example is the battle over natural gas exports. The "fracking" revolution that makes it possible to extract great wealth from the country's rich veins of shale deposits now holds the promise of turning the United States into the Saudi Arabia of natural gas. The gas gusher has already driven down domestic gas prices to all-time lows, with power companies rushing to convert coal-burning plants to gas while energy-intensive industries lay plans to move production back home from overseas. Proceeds from the sale of drilling rights have already created a new generation of Jed Clampetts, and natural gas boomtowns are springing up from the Appalachians to the Rockies. What once was a politician's fantasy — "energy independence" — now appears within reach.

Indeed, so much gas is flowing into the U.S. market that a huge gap has developed between the low price here and the high prices being paid in markets such as Europe and Japan. The gap is so large that, even allowing for the considerable cost of liquefying the gas, transporting it in ships and re-gassifying it at the other end, there is still an outsized profit to be made from exporting our cheap and plentiful supply.

Unlike other goods, however, exports of natural gas require a permit from the Department of Energy, which by law is required to consider a broad range of national economic, security and environmental interests in deciding whether to issue a permit. The natural gas industry touts a long list of benefits that will flow from exports, among them more jobs, higher incomes, increased investment, additional state and federal revenue and a lower trade deficit.

Not so fast say the electric power companies and chemical companies and other big users of natural gas. Permitting a large amount of the nation's gas supply to be exported will raise the domestic price by as much as 30 percent — and with it the price of products and services — jeopardizing jobs, income, investment, tax revenues and export sales.

The question, in other words, isn't whether there will be a windfall to be earned from the newfound abundance of natural gas. The real question is: Who will get to grab that windfall — the energy industry or its customers?

I don't know about you, but I'm having a hard time deciding which team to root for in this contest. While free trade tends to benefit the whole economy over the long run, increasing the size of the economic pie, there are times when it can also have a pronounced effect on how the pie is divided. This would seem to be one of those times.

But what if there were a policy that preserved most of the macroeconomic benefits of free trade but distributed benefits more fairly? As it turns out, there is one — although you are unlikely to hear about it from the gas industry or its customers.

I'm talking about a tax on natural gas, imposed at the wellhead, that would effectively raise the price from current levels to those closer to the world price. The effect on chemical companies and power companies and other end users would be roughly the same as allowing unrestricted exports to drive up the price. But instead of the energy industry capturing all the windfall, much of it could be captured instead by the government.

The proceeds from this tax could be rebated to consumers to offset the impact of higher electric prices. Or they could be used to compensate workers in the coal industry for job losses suffered as a result of new air pollution regulations and conversion of coal-burning plants to gas. Or they could be used simply to lower the government's operating deficit.

Such a tax would have to have some flexibility built into it, moving up or down with gas prices on the U.S. and global markets. And it would have to be modest enough to still provide a healthy profit for natural gas companies. The potential windfall is so large, however, that even after making these allowances, there could be $10 billion or more left over each year for the rest of us.

There is nothing particularly radical about this idea. There was once a windfall tax on oil company profits that was roughly structured this way. And almost every big energy exporting country accomplishes the same policy objective, either through royalty schemes or state ownership of energy companies. We could have a long philosophical debate about why oil and gas should be treated differently than software and soybeans, but the reality is that that's the way it is done everywhere else.

So put me down in favor of exporting all the natural gas the rest of the world wants to buy, just as long as the American taxpayers get cut into the deal. Otherwise, we're better off keeping our God-given bounty for ourselves and reaping the economic benefits that come from cheaper energy.

Tax on natural gas could bring wide benefits 12/29/12 [Last modified: Saturday, December 29, 2012 3:31am]
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